The MENA's perplexing economic pie

The topic of inclusive growth has captivated the minds of economists and politicians in the Middle East and North Africa (MENA) for some time.

The interest was there before the events of the Arab Spring and only intensified with the revolutions of 2011. But inclusive growth has eluded the countries of the MENA region. Why? A comparison of the experience of economies successful in achieving inclusive growth during past decades with the situation in MENA points to some areas MENA could address to reverse the fate of the last three decades.

The Growth Commission report identifies and reviews the experience of 13 economies which achieved inclusive growth, defined as high and sustained economic growth that leads to poverty reduction by lifting wages and creating jobs for millions of people. Although dominated by East Asia, the sample is diverse as it includes economies from around the world, some resource rich and some not. Only one of these economies – Oman – is located in the MENA region. Successful economies grew their average per capita incomes by 5 percent or more for a period of at least 30 years, reduced unemployment, and improved job quality. The average pace of MENA’s economic growth during a similar span of time pales by comparison. The latter grew their average per capita incomes by slightly less than 3 percent during the period 1969-2008. Notably, the region’s unemployment rate has been much higher than the rates in successful economies and good quality jobs in MENA’s private sector have been scarce.

The Growth Commission report identifies some similarities among the successful cases, although it cautions that generalizations are difficult because each successful economy followed a unique development path. All countries with strong and inclusive growth record traded intensively and benefited from global economic integration. They protected macroeconomic stability, let market forces allocate resources, and achieved high saving and investment rates. Importantly, they had governments committed to strategies for job creation and high, sustainable growth and improving institutional capacity.By contrast, trade played a relatively small role in MENA’s economic growth story. Non-oil export performance varied greatly across the region. Macroeconomic volatility and imbalances were a problem, in some countries more than others. Policy distortions prevented the efficient allocation of resources. Energy subsidies, in particular, biased production towards capital-intensive industries, while labor market distortions discouraged entry into the private sector and acquisition of skills demanded by the market. Rent seeking discouraged competition and technology upgrading, and access to finance was limited, especially for Small and Medium Enterprises. Governments chose to redistribute instead of creating conditions for inclusive growth and development. Redistribution occurred via subsidies, government sector employment and public investment. Importantly, institutions remained relatively weak with regulations applied in an uneven and preferential way. Weak rule of law discouraged private investment which remained relatively low and lowered the efficiency of public investment. There is no one-size-fits-all recipe for success when it comes to inclusive growth, but this comparison suggests that MENA countries will benefit from improving macroeconomic fundamentals, governance, and institutional capacity. Countries will have to remove costly distortions and other policies protecting rents, and improve incentives to trade, especially in manufacturing and services. Investments in manufacturing activities and services have much higher propensity to create jobs than investments in capital-intensive, resource-driven sectors. Such a reform agenda is ambitious and will require political vision, commitment and continuity, as well as strengthening support measures such as safety nets and training programs. Economies in the region will have to experiment and ultimately craft inclusive growth strategies that suit their unique strengths and conditions.